With the rise of interest rates comes naturally the end of the ultra-cheap money era, even for banks. Last October, the European Central Bank announced the wind-up of its 2.1 trillion EUR funding program, the TLTRO (Targeted Longer-term refinancing operations), with approximately 1.1 trillion EUR still to be redeemed. The final reimbursement is set for December 2024, but approximately 477bn EUR are maturing in June 2023.
While banks are still recovering from the recent stormy weather and despite them having published exceptional Q1 2023 results, the investors are now showing signs of nervousness toward the coming to maturity of TLTRO.
Through digging the ins and outs of this funding program, we draw the conclusion that this event should not be scary. The TLTRO had an expected and timed ending, European banks have been preparing for it. Indeed, they raised their liquidity levels, stacked cash with ECB deposits (offering low betas) and readied themselves to refinance TLTRO throughs the numerous solutions available, such as MRO, LTRO, or permanent funding sources. Thus, there is, in our view, no panic to look for funding.
The TLTRO was an exceptional measure devised for exceptional time, to help sustain European growth, and as it did, we are now back on a normalized track for rates, pulling closure on this chapter.
You can find more details in our analysis below.